Attorney-at-Law

THE EGG AND I – PART DEUX

In Uncategorized on 01/25/2021 at 16:37

No, not a reprise of Betty MacDonald’s 1945 best-seller, nor yet of the travails of Nichelle G. Perez (see my blogpost “The Egg and I,” 1/22/15). Judge James S (“Big Jim”) Halpern has for your perusal the story of William Bruce Costello and Maritza Legarcie, 2021 T. C. Memo. 9, filed 1/25/21, and how Maritza kept ’em down on the farm.

That’s chickens, which she raised first for meat and then for eggs, and then for meat again, but made no money either way. Finally, wild dogs ate most of her chickens. She also raised watermelons, squash, peppers, apples, bananas, pomegranates, date palms, and asparagus, but that also didn’t go well, as Maritza’s farm “…is on the edge of the world’s largest evaporative salt plant, and, in 1973, a spill from the salt plant created a salt flat on a portion of the property. Moreover, evaporation from the salt plant blows across the property and poisons the soil. Crops grown on the property are not commercially acceptable.” 2021 T. C. Memo. 9, at pp. 5-6.

Maritza refused to give up. She tried planting peppers, but the insects ate them up. Then she tried cattle, but the cattle couldn’t get enough to eat by gazing, so they were sold.

But Wm Bruce was no quitter. On the trial, he testified thus: “When you have something in a business that is not making money, you change it, and you figure out why it’s not making money. You evaluate to see if you could make it make money. If it doesn’t, you stop doing that and you start doing something else. He conceded: ‘[W]e have tried several things on this property; so far, nothing has worked.’ He was, however, hopeful that something would come along that would work and be profitable: ‘Will something come along that will work? When the right opportunity comes, financial conditions change, market conditions change, then yes, I fully expect to be able to make a profit. At the present moment, no, * * * [we] don’t.'” 2021 T. C. Memo. 9, at pp. 6-7. And during the two years at issue they didn’t. They deducted losses.

And also losses on rental real estate that had been flooded.

Judge Big Jim takes a quick peek at “the goofy regulation,” the Section 183 hobby loss with its nine factors, and decides Wm Bruce’s story is a good one. It clearly isn’t horsing around or having too much fun, but it is preoperational start-up and thus not deductible per Section 195.

“In order for expenses to be deductible under section 162(a), the expenses must relate to a trade or business functioning when the expenses were incurred.” 2021 T. C. Memo. 9, at p. 12. There follows a whole bunch of cases that say you have to be up and running. All that Maritza and Wm Bruce had done was try lots of farming activities, but none was sufficiently onstream.

And the rental real estate was untenantable, so losses disallowed. But the other rental properties that Maritza and Wm Bruce sold during one of the years at issue did show a capital gain, so no passive activity loss carryforward. IRS has to redo lots of numbers, so stand by for a Rule 155 beancount.

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